CHINA
22 March 2014
The Irascible Mitt Romney on China
For Asia-watchers, no-one could be more exasperating than the irascible Mitt Romney.
For Asia-watchers, no-one could be more exasperating than the irascible Mitt Romney. So many of his China-bashing comments are simplistic and fallacious, and his "get-tough-on-China" proposals are mostly wrong-headed and counter-productive.
For example, in one of the presidential debates, Romney claimed that the big gap between China's high exports to the US, and its low imports from the US (US trade deficit), was evidence that China is cheating.
As all China-watchers know, about 60 per cent of Chinese exports come not from Chinese enterprises, but from foreign multinational enterprises based in China (some American and others, some of which work for American enterprises). In this context, about half of China's exports are "processing trade", that is, exports for which China merely assembles components imported from other, more advanced countries.
A classic example is the i-Phone, which is assembled in China by the Taiwanese company, FoxConn, for which China's value added is less than 4% of the total value of the iPhone. The major part of the i-Phone's value comes from high-tech components manufactured by Japan, Korea, Germany and the US, as well the US product design.
In fact, as China has emerged as the global centre for low value added manufacturing assembly, the US trade deficit with other Asian countries has declined, as it has increased with China. In addition, a good share of China's other exports to the US are bottom of the range goods like toys, clothing, shoes and furniture.
On the import side, it is often claimed that China's markets are closed. In reality, since it joined the World Trade Organisation, China's import tariffs have become among the lowest of any developing country. It is not surprising thus that China's imports from the US have been growing dramatically over the past decade.
The trade deficit only provides a partial take on the US's economic transactions with China. The "current account", which includes services trade and other income, provides a much broader, comprehensive perspective. And here you will find that many US companies, like Apple, are earning large profits in China and elsewhere, and this income partly offsets the US trade deficit.
Typically about 20 per cent of revenues from each mobile phone and 30 per cent from each computer made in China are returned to the original investors or patent owners in the US and other countries. Obviously these profits benefit large companies, but they also ultimately benefit those citizens who are shareholders and see their dividends and share prices rise.
Another thing we need to know is that many US companies have decided to tackle the Chinese market by investing in China, and selling directly to the Chinese consumer, rather than producing at home in the US, and exporting. In fact, the sales of US companies in China far exceed their exports to China from the US. This means that America's "real trade deficit" with China is very much lower.
This may not create so many American jobs, although lots of Americans do work overseas for US companies. But if Mitt Romney does not like this, he should bash his own US corporate leaders because of their outsourcing, rather than bashing China. As China is becoming an important overseas investor itself, US and other companies are also selling to Chinese companies, based in Africa and elsewhere.
In short, international trade is becoming a very complex phenomenon, and Romney's simplistic presentation of the arguments is a gross distortion of reality.
Another point that he has been hammering away on is China's alleged currency manipulation. There is no doubt that China has been a currency manipulator in the past. But with the gradual appreciation of the Chinese RMB, and China's relatively high inflation in recent years, the RMB is now very much less undervalued. Even the International Monetary Fund has softened its stance, now calling Chinese RMB “moderately undervalued” against a basket of currencies, rather than “substantially undervalued”.
But currency manipulation is widespread in the world, as Joseph Gagnon has analysed. China is not the only one! He has identified four groups of the most egregious currency manipulators over the past 11 years: longstanding advanced countries such as Japan and Switzerland; newly industralized economies such as Israel, Singapore and Taiwan; developing Asian economies such as China, Malaysia and Thailand; and oil exports such as Algeria, Russia and Saudi Arabia. And you can even argue that oil exporters with sovereign wealth funds, like Kuwait, Norway and the United Arab Emirates, are also currency manipulators.
One question that Romney does not raise is whether the US itself is a currency manipulator. America's fiscal and monetary policies, especially quantitative easing, are "artificially" pushing down the value of the dollar.
Overall, the logic of Romney's China-bashing is highly questionable. It is true of course that China has many trade and investment barriers, but they are less than in the past. It is also true that China's state-owned enterprises receive much direct and indirect protection. But the overall case against China has very weak foundations.
The US itself also has barriers to free trade and investment, and to doing business domestically. And one of the greatest emerging barriers is against Chinese investment in the US. While legitimate competitive and national-security concerns do need to be addressed, this should not be excessive, as it seems to be now as seen in the reactions to companies like Huawei and ZTE.
Foreign companies can be an important source of jobs and growth. As Laura Tyson reports, foreign-owned firms in the US account for 5% of private-sector employment, 17% of manufacturing jobs, 21% of exports, 14% of research and development, and 17% of corporate-income taxes. Many years ago, Toyota was demonized as an unfair Japanese exporter, and now it is one of the very best companies to work for in the US.
At this stage, the US receives only about 2-3% of its total foreign direct investment flows from China. But China’s direct investments in the US have increased rapidly, from less than $1 billion annually in 2003-2008, to more than $5 billion per year in 2010-2011, and even futher to $6.3 in the first nine months of 2012. Some 30,000 US jobs are supported by Chinese companies investing in the US. And the potential for future growth is enormous as China seeks to diversify away from US Treasury Bonds.
My last point concerns Romney's plan to make America "strong". The US is already very strong, and will remain very strong for a long while. Even when the total size of the Chinese economy overtakes America's, the US will still be way ahead in terms of GDP per capita, military strength and technological sophistication. The main beneficiaries of any initiative to make the American militarily stronger would be corporations producing military equipment.
All Americans need to understand that with the rise of Asia and other emerging economies, we have shifted from a unipolar world to a multipolar world where America is not the only global power. This means that the US must work with other countries, and take into account the views of others.
Romney and others like to say that China should play by the "rules of the game". But these rules have been established by the US, and other Western countries. The West will progressively have to allow China and other emerging economies to participate equally in global rule-making. All of this means that it will be more important for America to be "smart" than strong.
Further, the big lesson of the Bush adventures in Iraq and Afghanistan is that the US needs to be much strategic about its military interventions. They are costly, and often a bad investment. American military families are tired of seeing too many deaths. And lastly, as the US experience over the past 60 years testifies, it is very difficult to win wars and achieve peaceful nations.
The greatest strategic priority for the US over the coming decades should be forging a serious partnership with China, as the basis for global peace and prosperity. Obama and Hilary Clinton have been working towards this, but it is a long and winding road for many reasons -- not the least because of internal instability in China and lack of wisdom in much of America.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
For example, in one of the presidential debates, Romney claimed that the big gap between China's high exports to the US, and its low imports from the US (US trade deficit), was evidence that China is cheating.
As all China-watchers know, about 60 per cent of Chinese exports come not from Chinese enterprises, but from foreign multinational enterprises based in China (some American and others, some of which work for American enterprises). In this context, about half of China's exports are "processing trade", that is, exports for which China merely assembles components imported from other, more advanced countries.
A classic example is the i-Phone, which is assembled in China by the Taiwanese company, FoxConn, for which China's value added is less than 4% of the total value of the iPhone. The major part of the i-Phone's value comes from high-tech components manufactured by Japan, Korea, Germany and the US, as well the US product design.
In fact, as China has emerged as the global centre for low value added manufacturing assembly, the US trade deficit with other Asian countries has declined, as it has increased with China. In addition, a good share of China's other exports to the US are bottom of the range goods like toys, clothing, shoes and furniture.
On the import side, it is often claimed that China's markets are closed. In reality, since it joined the World Trade Organisation, China's import tariffs have become among the lowest of any developing country. It is not surprising thus that China's imports from the US have been growing dramatically over the past decade.
The trade deficit only provides a partial take on the US's economic transactions with China. The "current account", which includes services trade and other income, provides a much broader, comprehensive perspective. And here you will find that many US companies, like Apple, are earning large profits in China and elsewhere, and this income partly offsets the US trade deficit.
Typically about 20 per cent of revenues from each mobile phone and 30 per cent from each computer made in China are returned to the original investors or patent owners in the US and other countries. Obviously these profits benefit large companies, but they also ultimately benefit those citizens who are shareholders and see their dividends and share prices rise.
Another thing we need to know is that many US companies have decided to tackle the Chinese market by investing in China, and selling directly to the Chinese consumer, rather than producing at home in the US, and exporting. In fact, the sales of US companies in China far exceed their exports to China from the US. This means that America's "real trade deficit" with China is very much lower.
This may not create so many American jobs, although lots of Americans do work overseas for US companies. But if Mitt Romney does not like this, he should bash his own US corporate leaders because of their outsourcing, rather than bashing China. As China is becoming an important overseas investor itself, US and other companies are also selling to Chinese companies, based in Africa and elsewhere.
In short, international trade is becoming a very complex phenomenon, and Romney's simplistic presentation of the arguments is a gross distortion of reality.
Another point that he has been hammering away on is China's alleged currency manipulation. There is no doubt that China has been a currency manipulator in the past. But with the gradual appreciation of the Chinese RMB, and China's relatively high inflation in recent years, the RMB is now very much less undervalued. Even the International Monetary Fund has softened its stance, now calling Chinese RMB “moderately undervalued” against a basket of currencies, rather than “substantially undervalued”.
But currency manipulation is widespread in the world, as Joseph Gagnon has analysed. China is not the only one! He has identified four groups of the most egregious currency manipulators over the past 11 years: longstanding advanced countries such as Japan and Switzerland; newly industralized economies such as Israel, Singapore and Taiwan; developing Asian economies such as China, Malaysia and Thailand; and oil exports such as Algeria, Russia and Saudi Arabia. And you can even argue that oil exporters with sovereign wealth funds, like Kuwait, Norway and the United Arab Emirates, are also currency manipulators.
One question that Romney does not raise is whether the US itself is a currency manipulator. America's fiscal and monetary policies, especially quantitative easing, are "artificially" pushing down the value of the dollar.
Overall, the logic of Romney's China-bashing is highly questionable. It is true of course that China has many trade and investment barriers, but they are less than in the past. It is also true that China's state-owned enterprises receive much direct and indirect protection. But the overall case against China has very weak foundations.
The US itself also has barriers to free trade and investment, and to doing business domestically. And one of the greatest emerging barriers is against Chinese investment in the US. While legitimate competitive and national-security concerns do need to be addressed, this should not be excessive, as it seems to be now as seen in the reactions to companies like Huawei and ZTE.
Foreign companies can be an important source of jobs and growth. As Laura Tyson reports, foreign-owned firms in the US account for 5% of private-sector employment, 17% of manufacturing jobs, 21% of exports, 14% of research and development, and 17% of corporate-income taxes. Many years ago, Toyota was demonized as an unfair Japanese exporter, and now it is one of the very best companies to work for in the US.
At this stage, the US receives only about 2-3% of its total foreign direct investment flows from China. But China’s direct investments in the US have increased rapidly, from less than $1 billion annually in 2003-2008, to more than $5 billion per year in 2010-2011, and even futher to $6.3 in the first nine months of 2012. Some 30,000 US jobs are supported by Chinese companies investing in the US. And the potential for future growth is enormous as China seeks to diversify away from US Treasury Bonds.
My last point concerns Romney's plan to make America "strong". The US is already very strong, and will remain very strong for a long while. Even when the total size of the Chinese economy overtakes America's, the US will still be way ahead in terms of GDP per capita, military strength and technological sophistication. The main beneficiaries of any initiative to make the American militarily stronger would be corporations producing military equipment.
All Americans need to understand that with the rise of Asia and other emerging economies, we have shifted from a unipolar world to a multipolar world where America is not the only global power. This means that the US must work with other countries, and take into account the views of others.
Romney and others like to say that China should play by the "rules of the game". But these rules have been established by the US, and other Western countries. The West will progressively have to allow China and other emerging economies to participate equally in global rule-making. All of this means that it will be more important for America to be "smart" than strong.
Further, the big lesson of the Bush adventures in Iraq and Afghanistan is that the US needs to be much strategic about its military interventions. They are costly, and often a bad investment. American military families are tired of seeing too many deaths. And lastly, as the US experience over the past 60 years testifies, it is very difficult to win wars and achieve peaceful nations.
The greatest strategic priority for the US over the coming decades should be forging a serious partnership with China, as the basis for global peace and prosperity. Obama and Hilary Clinton have been working towards this, but it is a long and winding road for many reasons -- not the least because of internal instability in China and lack of wisdom in much of America.
Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com
REFERENCES:
- Yuqing Xing and Neal Detert. How the iPhone Widens the United States Trade Deficit with the People's Republic of China. Asian Development Bank Institute Working Paper No: 257.- U.S.-China Trade Imbalance, US/China media brief. UCLA Asian American Studies Center
- Chunding Li, John Whalley, Yan Chen. Foreign affiliate sales and the measurement of trade in goods and services. Vox, 8 October 2010
- Joseph E. Gagnon. Combating Widespread Currency Manipulation. Peterson Institute of International Economics. Policy Brief Number PB12-19, July 2012
- Laura Tyson. The Benefits of Chinese FDI. Project Syndicate. 2 August 2012.